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Thursday, 17 September 2015

Lifting of Iran sanctions to fuel Islamic finance growth

The lifting of international sanctions on Iran will boost the country's economy and fuel the growth of Islamic finance, Standard & Poor's Ratings Services said on Tuesday.

For Iran - one of the largest players in the Islamic finance industry contributing to around 40 per cent of global Islamic banking assets - the lifting of sanctions could bring about its eventual economic rebound and help boost Islamic finance.

The ratings agency said in a report that if Iran meets all deliverables, sanctions may start to lift in the first half of 2016.

The World Bank estimates this would help Iran's oil exports rebound to pre-2012 sanction levels within eight to 12 months. Sanctions lifting could also restore Iran's access to the global financial markets. Under this scenario, Iran's GDP growth would hover around six per cent annually in fiscals 2017 and 2018 according to market estimates, compared with less than one per cent in 2015.

"We expect that accessing the sukuk market might help Iran raise funding for its projects and be seen by global Islamic investors as a diversification opportunity. The Islamic financial market could also benefit from volume effects as post-sanction investment projects are reportedly high. This could support market growth in the medium term," S&P said.

The flipside of sanction removals is the possible drop in oil prices. This could intensify pressure on some oil exporting countries that rely heavily on oil revenues, in turn curbing their spending and banking system growth, the report said.

Tehran is aiming to ramp up oil production despite a supply glut that has sent prices down drastically.

Iran, which has the fourth-biggest oil reserves in the world and is pumping about 2.8 million barrels a day, is expected to add between 600,000 and one million barrels to output once sanctions are lifted.

But Iranian authorities are much more bullish and aim for an increase of close to 1.5 million barrels by the end of 2016, taking daily production to 4.2 million.

For banks in the UAE and Lebanon, the opening up of the Iranian economy bodes well with Tehran lining up $100 billion worth of energy deals to kick-start its economy.

Potentially, Western, Chinese and Indian banks also will likely be attracted to Iran's diversified economy and significant trade flows, according to Moody's.